NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Externalities and Benefit Design in Health Insurance

Amanda Starc, Robert J. Town

NBER Working Paper No. 21783
Issued in December 2015, Revised in April 2018
NBER Program(s):Health Care, Industrial Organization

Insurance plan design has important implications for consumer welfare. In this paper, we model insurance design in the Medicare prescription drug coverage market and show that strategic private insurer incentives impose a fiscal externality on the traditional Medicare program. We document that plans covering medical expenses have more generous drug coverage than plans that are only responsible for prescription drug spending, which translates into higher drug utilization by enrollees. The effect is driven by drugs that reduce medical expenditure and treat chronic conditions. Our equilibrium model of plan design endogenizes plan characteristics and accounts for selection; the model estimates confirm that differential incentives to internalize medical care offsets can explain disparities across plans. Counterfactuals show that strategic insurer incentives are as important as selection in determining endogenous plan characteristics.

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Document Object Identifier (DOI): 10.3386/w21783

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